Manhattan 2002: Surprising Leasing Strength

In the lingering aftermath of 9/11, no one expected a spectacular year for leasing activity in Manhattan. But 2002 is now on record as one of the strongest years in the history of New York City retail real estate. In addition, a reasonable degree of momentum persisted into the first quarter of 2003. All of this is surprising given that consumer confidence, which ended 2001 at a respectable 93.7, dropped to 83.8 as of the end of 2002, and stood, at the end of March, at 62.5 — a one-third decline in just 14 months. This is the lowest the index has been since October of 1993, when it fell to 60.5.

Further, the regional and national economic slowdown has manifested itself most clearly in New York City by the dramatic contractions across all industry segments, including those upon which the city most heavily depends — technology, health care, telecommunications and financial services. From September 2001 to December 2002, the city lost 154,500 jobs.

So far that hasn't hurt the leasing business, though the future is uncertain as retailers ponder the implications of employment, consumer confidence and world events such as the war in Iraq. Last year, Manhattan's prime shopping areas, notably upper Madison Avenue, Fifth Avenue, 57th Street and Times Square, saw strong leasing activity, tightening supply and generally unwavering asking rents.

Times Square, despite the uncertainty plaguing office leasing in this market segment, continued its evolution as the city's most dynamic retail environment, and saw deals completed by Swatch, Quicksilver, Champs, Foot Locker, Red Lobster and Skechers, among others.

2002 Manhattan Leases By Category

Industry

Total Deals

% of Total

Total Sq. Ft.

% of Total

Average Sq. Ft. Per Deal

Banks/Retail Financial Services

14

10%

53,407

6%

3,815

Food

35

26%

234,846

26%

6,710

Drug Stores

4

3%

27,991

3%

6,998

Spas/Gyms

5

4%

25,925

3%

5,185

Home Accessories & Furniture

12

9%

76,914

9%

6,410

Apparel — All

33

25%

121,307

14%

3,676

Electronics — All

6

4%

11,084

1%

1,847

Misc. Conventional Retail

25

19%

346,186

39%

13,847

Totals

134

100%

897,660

100%

48,488

Disclaimer: Sample data is based on internal Indignia/ESG data collection, and is not inclusive of all retail transactions completed in Manhattan during the analysis period.

Several factors in our region coalesced to support this level of activity and provide an offset to our area's weakening economic environment. For example:

Aggressive Federal Reserve policies created the most favorable interest rates in a generation, resulting in, among other things, an unprecedented national wave of home refinancing that put significantly more money in the pockets of New York-area consumers — money they were willing to spend.

New York remains the first choice for international retailers seeking to come to the United States and for those domestic retailers looking to expand on the East Coast. The leases with DeBeer's at the St. Regis and Best Buy at 86th and Lexington Avenue (in the former HMV space) are prime examples.

Perhaps most significantly, several categories of tenants have, and continue to, maintain their strategies of increased market share in Manhattan, prompting fierce competition for well-located retail space. In particular, banks (Washington Mutual, Commerce, Fleet, North Fork, etc.), drug stores (CVS, Duane Reade, etc.), food tenants (Allied Domecq, Subway, Quizno's, Chipotle, etc.), spas and select apparel retailers were all extremely active in the region. This has led to a chronic shortage of quality space in the City's prime markets, a sense of competition for quality spaces when they become available and a predictable steadiness in rents.

Taking all of this information into account, it is interesting to examine where the most leasing activity has actually been generated over the previous six months, and what this might indicate for the balance of this year. Banks, food tenants and drug stores have been extremely active, but digging deeper into levels of activity by industry segment reveals the following:

In line with expectations, banks and food tenants have accounted for 37 percent of the transactions and nearly one-third of leased space. On the other hand, it appears drug store leasing may have run its course for now. More interestingly, other industry segments, particularly apparel and miscellaneous conventional retail, are showing quite good levels of activity, with 43 percent of the transactions and 52 percent of space leased.

While these recent results are by no means a predictor of future activity, we can for now be encouraged by the fact that there is velocity in the market, and tenant activity is apparent in a number of industry verticals. While today's market has momentum and an adequate supply of active tenants, fears of further layoffs, terrorism on our shores and further international are clearly weighing heavily on the minds of consumers and testing their continued willingness to spend.

This is well illustrated by February's drop in retail sales, which was about three times the size expected by Wall Street. Weakness was distributed across all industry segments, with declines reported for automobile dealers, electronics and appliance stores, apparel shops and other merchants, while harsh weather across much of the nation caused building and garden supply stores to post a record drop in sales.

Expect retailers to respond to any sustained slowdown with aggressive cost cutting, elimination of marginal operations, and reduction of leasing activity until the future becomes more clear.